Notice of Proposed Rulemaking, REG-119882-25, RIN 1545-BS06, ‘Application of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 to the Refunded Portion of Certain Federal Refundable Tax Credits,’ Scheduled for Publication in the Federal Register on August 20, 2026 (Federal Register Doc. 2026-16985)

The Department of the Treasury and the Internal Revenue Service have released a notice of proposed rulemaking, REG-119882-25 (RIN 1545-BS06), that represents a shift in the intersection of tax administration and federal immigration policy. This proposed regulation seeks to apply Title IV of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA), Public Law 104-193, 110 Stat. 2105, to the refunded portion of certain individual refundable tax credits, collectively designated as the “affected refundable tax credits”.

Under the proposed rules, individuals who are not “qualified aliens” under PRWORA would be ineligible to receive the cash-refunded portion of these credits, though they would remain eligible to use the credits to reduce their actual tax liability to zero. This article provides a comprehensive technical analysis of the background, legal authority, justification, operative changes, and planning implications of these proposed regulations for CPAs and Enrolled Agents (EAs).

The Statutory Backdrop of PRWORA and the Evolution of Treasury Policy

To understand the impetus behind REG-119882-25, tax professionals must examine the statutory framework of PRWORA. Section 401(a) of PRWORA, codified at 8 U.S.C. § 1611(a), establishes the sweeping rule that aliens who are not “qualified aliens” are not eligible for any “Federal public benefit”. The statute defines a “Federal public benefit” under 8 U.S.C. § 1611(c)(1)(B) as “any retirement, welfare, health, disability, public or assisted housing, postsecondary education, food assistance, unemployment benefit, or any other similar benefit for which payments or assistance are provided to an individual, household, or family eligibility unit by an agency of the United States or by appropriated funds of the United States”.

A “qualified alien” is defined in 8 U.S.C. § 1641(b) to include lawful permanent residents, asylees, refugees, parolees for at least one year, and certain battered non-citizens. Historically, “Prior to 2018, the Treasury Department and the IRS had not viewed tax benefits, including refundable credits, as constituting Federal public benefits under PRWORA”.

The policy landscape began to shift in 2018 when the Treasury Department initiated a reconsideration of the Earned Income Tax Credit (EITC) under Section 32, the Child Tax Credit (CTC) under Section 24, and the American Opportunity Tax Credit (AOTC) under Section 25A. This prompted a request to the Department of Justice’s Office of Legal Counsel (OLC). On December 9, 2020, OLC issued a memorandum (the 2020 OLC Opinion) opining that the refunded portion of these tax credits “may reasonably be construed as a ‘Federal public benefit’ for which nonqualified aliens are generally ineligible under PRWORA”. However, the 2020 OLC Opinion explicitly stated, “you have not asked us to consider, and we do not reach, the question whether this is the only permissible reading of the statute”.

The regulatory process accelerated dramatically following the issuance of Executive Order 14218, “Ending Taxpayer Subsidization of Open Borders” (90 FR 10581), on February 19, 2025. This Executive Order directed federal agencies to identify federally funded programs and ensure they comply with Title IV of PRWORA. Consequently, the Treasury submitted a second request to OLC asking whether this interpretation represented the “best reading of the law,” particularly in light of the landmark Supreme Court decision in Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024), and whether the Premium Tax Credit (PTC) and Saver’s Match were also covered. On November 19, 2025, OLC issued a Memorandum Opinion (the 2025 OLC Opinion) concluding that the EITC, CTC, AOTC, PTC, and Saver’s Match indeed constitute “Federal public benefits” and that this interpretation reflects the “best view of the law”. These proposed regulations incorporate the reasoning of both opinions.

IRS and Treasury Legal Justification: Tax Refund vs. Federal Public Benefit

A critical technical distinction in these regulations is the division between a taxpayer’s reduction of tax liability and the receipt of an actual cash refund. The IRS and Treasury rely on the OLC’s analysis to justify their regulatory authority under Section 7805(a). In analyzing the application of PRWORA to tax credits, the OLC first evaluated whether the refunded portion constitutes a “benefit” and a “payment” under 8 U.S.C. § 1611(c).

The OLC opined that the refunded portion of these credits is a benefit “based on the ordinary meaning of the word since it results in a payment from the Federal government to the taxpayer that goes beyond a return of money paid by the taxpayer to the Federal government”. Crucially, OLC distinguished the refunded portion of these refundable tax credits from an “ordinary tax refund”. An ordinary tax refund was described as “a return to the taxpayer of his own money that Treasury had held until the taxpayer’s net obligations for the tax period could be settled”.

By contrast, the refunded portion provides a “payment” because it “gives the taxpayer money that the taxpayer did not earn and would not have received but for the existence of the government program”. Furthermore, the refunded portion satisfies the requirement of being provided by a federal agency (the Treasury Department through the IRS) and funded by “appropriated funds of the United States (namely the permanent indefinite appropriation of amounts necessary for refunding internal revenue collections in 31 U.S.C. 1324)”.

Under this framework, the OLC classified the affected refundable credits into categories matching the public benefit definitions. The EITC and the Additional Child Tax Credit (ACTC) are classified as “welfare or other similar benefits,” while the AOTC is classified as a “postsecondary education benefit”. Since the adoption tax credit under Section 23 was made partially refundable by Section 70402 of the One Big Beautiful Bill Act (OBBBA), Pub. L. No. 119-21, 139 Stat. 72 (2025), Treasury has incorporated it as a “similar benefit”. Although Section 23 was not specifically addressed by OLC, the Department of Health and Human Services (HHS) has determined that federal adoption assistance benefits are Federal public benefits (63 FR 41658), making it legally consistent to treat the refundable portion of the tax credit similarly under PRWORA.

Revisions, Additions, and Deletions to CFR Part 1

To implement these statutory restrictions, the notice of proposed rulemaking adds proposed §§ 1.23-2, 1.24-3, 1.25A-7, and 1.32-4 to 26 CFR Part 1. These additions outline several key changes, additions, and safe harbors that tax professionals must master:

Operative Definition of the Refunded Portion: The proposed regulations clarify that only the refunded portion of an affected credit is a Federal public benefit. The proposed rules do not bar the nonrefundable portion. Thus, if an alien taxpayer is eligible for the credit under the Code but is not a U.S. citizen, national, or qualified alien, the taxpayer may still utilize the credit to reduce their subtitle A tax liability to zero. However, the amount of any overpayment under Section 6401(b) available for refund, credit, or offset will be reduced by the amount of the “Federal public benefit” (i.e., the portion of the credit exceeding tax liability). Under the proposed rules, if a taxpayer claims multiple affected credits (e.g., both ACTC and AOTC), they must first sum the credits and then calculate the portion of that sum which exceeds tax liability to determine the disallowed public benefit.

Timing of Alien Status Determination: Proposed §§ 1.23-2(e), 1.24-3(e), 1.25A-7(e), and 1.32-4(e) establish that a taxpayer’s status as a qualified alien is determined “on the date the taxpayer files the taxpayer’s return for the taxable year that first claims” the affected credit. This filing date applies whether the return is an early, late, or amended return. Crucially, a post-filing status change cannot retroactively qualify an ineligible claim. If a taxpayer was not a qualified alien on April 15 when they filed their return claiming the credit, but later becomes a qualified alien on December 1, filing an amended return on December 15 does not make them eligible to receive the refunded portion. Conversely, if the taxpayer did not claim the credit on their original April 15 return, but claims it for the first time on an amended return on December 15 (after gaining qualified alien status), they are eligible because the amended return represents the date they “first claimed” the credit.

Joint Return Safe Harbor: Recognizing that the EITC, AOTC, and adoption tax credit generally require married couples to file joint returns, Treasury and the IRS considered proration rules but rejected them due to extreme administrative complexity. To minimize compliance burdens and potential return errors, proposed § 1.32-4(b)(4) provides a significant safe harbor: “In case of married individuals filing a joint return, if one spouse is a U.S. citizen, U.S. national, or qualified alien, then the other spouse will be treated as a qualified alien”. Only one spouse must satisfy the citizenship or qualified alien status requirements for the couple to receive the full joint refund of the affected credits.

Self-Certification and Schedule 3-A: Taxpayers claiming an affected refundable credit that results in an overpayment will be required to self-certify their eligibility under penalty of perjury. This declaration must be made on “Schedule 3-A, or other form as determined by the Treasury Secretary,” filed with their Form 1040. Failure to submit this verification will result in the immediate disallowance of the refunded portion. Under Section 6065 of the Code, all returns and claims must be verified by a written declaration made under the penalties of perjury. Tax professionals should warn clients of the severe penalties involved: Section 7206 provides that willfully providing incorrect or untrue information on a return is a felony carrying a fine up to $100,000 and up to three years in prison. Furthermore, knowing false statements regarding citizenship to obtain federal benefits are punishable as felonies under 18 U.S.C. § 1015(e) and 18 U.S.C. § 1001.

Treatment of Excluded and Deferred Credits

While OLC opined in 2025 that the Premium Tax Credit (PTC) under Section 36B and the Saver’s Match under Section 6433 are Federal public benefits under PRWORA, the IRS has made a deliberate decision to exclude or defer these credits in the proposed rules:

Premium Tax Credit (Section 36B): The proposed regulations do not apply PRWORA restrictions to the refunded portion of the PTC. The Treasury Department accepts the OLC’s view that “Congress can always supersede existing statutes, including PRWORA, with later-[en]acted laws”. In the case of the PTC, Congress enacted specific immigration status restrictions within the Affordable Care Act (ACA), codified at 42 U.S.C. § 18032, and the OBBBA under Section 36B(e). These later-enacted, credit-specific provisions override and supersede the general PRWORA requirements. For instance, the ACA restricts health plan enrollment to citizens, nationals, or “lawfully present” aliens, and OBBBA further narrows eligibility to “eligible aliens” for tax years after December 31, 2026. Because Congress specifically addressed immigration status in the context of the PTC, the IRS has concluded that these provisions govern to the exclusion of PRWORA.
Saver’s Match (Section 6433): The Saver’s Match, which replaces the Saver’s Credit for tax years beginning after December 31, 2026, is also a Federal public benefit. However, the Treasury and IRS have stated in the preamble that they “intend to promulgate proposed regulations regarding the Saver’s Match separately”.
Trump Accounts Contribution Pilot Program (Section 6434): Contributions under this pilot program are statutorily restricted strictly to children who are U.S. citizens under Section 6434(c)(3). Consequently, a PRWORA determination is unnecessary as the statutory citizenship restriction already supersedes and overrides the qualified alien framework of PRWORA.

Proposed Effective Date and the Crucial Issue of Taxpayer Reliance

The proposed applicability date of these regulations is of paramount importance for CPAs and EAs when advising clients. Proposed §§ 1.23-2(g), 1.24-3(g), 1.25A-7(g), and 1.32-4(g) provide that the regulations “apply to taxable years ending on or after [the date of publication of final regulations in the Federal Register]”.

Regarding taxpayer reliance pending the issuance of final regulations, tax professionals must exercise extreme caution. The preamble to REG-119882-25 does not contain a clause allowing taxpayers or tax preparers to rely on these proposed regulations prior to their finalization. Unlike some proposed regulations where Treasury expressly authorizes interim reliance, these rules are purely prospective and will not become operative until published as final regulations. Consequently, the historical baseline—wherein the IRS does not apply PRWORA eligibility restrictions to deny refundable portions of these credits—remains the governing administrative standard until the final regulations are promulgated. Tax preparers should continue to file returns under existing law, while preparing affected clients for the substantial compliance changes on the horizon once the regulations are finalized.

Prepared with assistance from Gemini Notebook.